Trust in Financial Markets: Evidence from Reactions to Earnings News
Management Science forthcoming
54 Pages Posted: 12 Nov 2014 Last revised: 18 Mar 2022
Date Written: March 1, 2022
Abstract
This paper studies the effect of trust on the perceived credibility of earnings news. Using earnings response coefficients, we find that firms located in low trust regions of the United States experience significantly lower stock price reactions to earnings news. Additional tests indicate that managers can counter balance investors’ dependence on trust by employing reputable auditors or signaling the quality of their earnings using dividends to improve the perceived credibility of their financial reports. Overall, our findings suggest that trust affects the pricing of earnings news in capital markets.
Keywords: Trust, earnings response coefficients, auditor quality, financial reporting
JEL Classification: G12, G14, G18, M41, M49, Z1
Suggested Citation: Suggested Citation
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